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Innovate! Innovate! Innovate! This mantra of Silicon Valley is fast becoming the new rally cry of corporate executives. Each new wave of digitalization speeds up business cycles and opens new opportunities, bringing in new competitors and hordes of startups that individually or as a pack rip out juicy pieces of long-defended business models. When profit margins are already low, this can fast turn into an existential threat for the incumbents. Innovation strategies are a good course of action to again secure higher margins, but today, innovation needs to happen much faster than corporate structures are able to deliver them.

In increasingly desperate attempts to keep up in the innovation race against digital giants like Amazon or Alibaba, corporations therefore try to innovate outside the confines of corporate structures and procedures. Investments in startups, digital labs and innovation incubators are the new pet projects of corporate executives.

This trend now has continued for some years, and we have participated in these corporate innovation efforts ourselves. We also closely observed similar initiatives, and spoke with many incubation teams during all phases of their innovation lifecycle. It’s time to take a look at the bottom line: How effective are corporate incubators in delivering innovation that is valuable for their sponsors?

The Good

Corporate incubators are good at attracting innovators and creative people. Outside of the sponsoring corporation, they can easily develop a culture that fosters ideas and experimentation. The extent to which they can deliver valuable innovations depends on the support, mentoring and freedom they receive through their corporate sponsors. In the best case, incubation teams are able to come up with innovative ideas that fit to existing business capabilities and business models of their sponsoring corporation. This type of innovation can easily be transferred from the incubator to the corporation. The corporation can then use its existing structures and large resources to rapidly exploit the new business opportunities at scale. We have so far observed only very few cases where this worked well, one of them being kloeckner.i.

The Bad

The chance of successfully transferring an innovative business opportunity from an incubation team to their sponsoring corporation is really slim. Corporations massively underestimate the necessary preparation efforts on their own side: They need to closely supervise startups to ensure that innovations later fit to corporate structures, business capabilities and procedures. And they need to prepare structures, adapt existing and possibly build up new business capabilities inside their corporation to rapidly support and scale innovative business opportunities. We rarely saw this happening. In most cases, the incubation teams delivered innovations that turned out to be incompatible with the sponsoring corporation. Value streams, customer experiences and business capabilities developed in incubation teams could simply not be sufficiently replicated inside the sponsoring corporation. Collaboration between the incubation teams and the corporation is a prerequisite for successful transfer and scaling of their innovations. This collaboration is hard to achieve, when the biggest barrier is exactly the main factor that sets incubation teams apart from corporations: Their culture of innovation. They need to do things differently, and in the process alienate themselves from their supposed co-workers in corporations. It is a systemic risk associated with all corporate incubation efforts and the main reason for weak results.

The Ugly

Weak results lead to frustration on all sides. Employees toiling in the corporation envy colleagues working in incubators for their freedom, high-level attention and support. Their managers have to deal with this frustration. On top of that, exotic requests of the incubation teams distract them from their real business, making their job more difficult. On the other side, incubation teams realize time and again how great ideas and valuable business opportunities slowly die in the sponsoring corporation. Corporate managers slice and dice them until nothing is left. The frustration of the innovators can become so big that they leave the company. We have seen it happening in dozens of cases. Highly motivated, highly educated, skilled and creative employees leaving companies because these were structurally unable to live up to the innovative aspirations that they inspired in their work force. The brain drain associated with this exodus of creativity is bad enough. Far worse is the unspoken message associated with each such departure. It is simple, and instantly understood by all employees: DON’T DO INNOVATION. At this point, corporate incubators achieve the opposite of their intent. They weaken the innovative strength of a corporation.

To put it in a nutshell: The success of corporate incubators does not depend so much on their own performance, but much more on the efforts of their sponsoring companies to prepare themselves for innovation. Key is a culture that embraces new ways of doing business, and leadership that carefully directs employees to adapt.